Copper prices steady as weak technicals battle with optimism around China

Traders now looking ahead to US industrial out put and consumer sentiment numbers out later in the day on Friday, after disappointing retail sales numbers cast a shadow over Thursday's trading

Author: Nick Trevethan (Reuters)
Posted: Friday , 15 Jan 2010

SINGAPORE (Reuters) -

Copper in London and Shanghai were little changed on Friday as a weaker technical outlook and concerns about inventories vied with optimism about Chinese demand and the prospect of tighter supplies in the future.

Three-month copper on the London Metal Exchange rose $10 to $7,500 a tonne by 0235 GMT, having bounced off a two-week low around $7,300 mid-week.

Benchmark third-month Shanghai copper was largely unchanged, down 20 yuan at 60,760 yuan. Shanghai metal traded at a premium of around 850 yuan to London, keeping arbitrage trading profitable.

But weak U.S. retail and unemployment data on Thursday cast a shadow over the market and raised fears that Friday's numbers, including industrial output and consumer sentiment, may also disappoint.

Technically, copper may be heading for a period of weakness. A rally that started in mid-December broke on Jan 7 and since then, copper has twice tested 50% Fibonacci retracement support around $7,308.

However, the MACD has crossed, which may spell another bout of weakness for the market, potentially targeting $7,200.

"There is a bearish tone in the market and there is a gap between $7,200 and $7,300 that will probably be covered," a trader at a large bank in Singapore said.

The trader added that in the longer term, there was potential for support from falling processing fees for copper, suggesting tightening market conditions.

Japan smelters and BHP Billiton agreed 2010 copper treatment and refining charges of $46.5 a tonne and 4.65 cents a pound, an industry source said.

That was on par to levels agreed between Japanese smelters Sumitomo Metal Mining Co Ltd and Pan Pacific and Freeport McMoRan and down from $75/7.5 cents set for 2009.

But rising LME inventories continued to worry investors, with copper stocks increasing by another 2,200 tonnes on Thursday to 523,975 tonnes.

However a rise in cancelled warrants in Busan in South Korea, and talk that as much as 40,000 tonnes of LME metal may soon be cancelled supported sentiment.

Aluminium performed strongly in Shanghai, up 0.8 percent at 17,560 yuan, but in London, prices fell $7 to $2,320.

Aluminium, sometimes called "congealed energy" because of the huge amount of power needed to smelt the metal, may see more support from electricity shortages in China.

The Chinese government is encouraging more coal and natural gas imports as part of an effort to increase supply of energy and counter power shortages across the country, the official Xinhua News Agency reported.

Chinese vice premier Li Keqiang also said power supplies should be reduced for energy-intensive and high-emitting plants, as well as plants in industries with excessive production capacity.

Capping aluminium's prospects is a mountain of metal in LME warehouses -- some 4.59 million tonnes or enough to build a column one metre square and around 2,300 kilometres high.

"From a stocks perspective, aluminium looks overpriced to the tune of $500 or so. There is also a lot of excess capacity, but if you look at the market from the cost side, it's very cheap," a Singapore-based merchant said.

He said based on current energy prices, the cost of production for Western smelters was round $2,150 to $2,250 and even in China the cost was $2,000 to $2,100.

"That's why people weren't impressed with Alcoa's results -- they highlight the lousy cost structure."

Early this week, Alcoa Inc kicked off the earnings season with earnings of 1 cent a share on an operating basis, short of the 6 cents a share expected, on average, by analysts. according to Thomson Reuters I/B/E/S.

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